What Business Owners Need to Know

Key Takeaways:
  • Watch for 2025 tax changes like 100% bonus depreciation and immediate R&D expense deductions.
  • Use year-end strategies like energy tax credits and TCJA provisions to save now.
  • Consult advisors to plan for lower tax rates and new credits that may affect your business.

 

The ease with which year-end tax planning is done depends largely each year on how significantly the federal tax code has changed. This year, while there have been no major changes, good tax planning should always incorporate an eye to the future. The impending change of administrations in Washington – along with major differences in economic priorities – promises to make 2025 a year of activity in the tax code. A unified government, with the White House and Congress in Republican control, could likely set the stage for quick passage of President-elect Donald Trump’s tax policies. 

Some of those policies were articulated during the presidential campaign and others are more speculative. But one thing is known – Trump seeks to affirm his commitment to maintaining and, possibly, making permanent the provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, enacted during his first administration. 

For business owners engaging in year-end tax planning this year, that means considering what changes may be made in the tax code in the near future and how they may impact both your business and your personal tax situations. 

Based on ideas put forth during the presidential campaign and observations made by economists and Trump advisors, some of the changes that may take place in 2025 include: 

Reinstating 100% bonus depreciation retroactively. In a boon for business owners, 100% bonus depreciation was included in the TCJA, but was scheduled to phase out by 20% per year over several years. It stands at 60% for 2024 and is scheduled to drop to 40% in 2025. However, if the Trump administration restores it to 100% and makes it retroactive, as has been discussed, business owners who purchase and place equipment into service before Dec. 31, 2024, could reap a bigger tax benefit. If you are considering purchasing and placing equipment in service by the end of this year, analyze how a change in bonus depreciation may impact you and whether it may be worthwhile to increase your investment. 

Restoration of the ability to deduct eligible research and development expenses in the year incurred. Specifically, Section 174 allowed the deduction of eligible expenses paid in the year incurred. This was extremely useful for many businesses because they could immediately recoup costs related to research and development and use the tax benefit to fund ongoing innovation. However, when the TCJA was passed in 2017, one of the ways it funded a large corporate tax rate cut was to change the timing of Section 174 expensing. In 2022, the rule was changed, requiring companies to amortize these expenses over a 5-year period for domestic expenses or a 15-year period for international costs. This change in timing has had significant cash flow implications for businesses with sizeable expenses of this type. Legislation that would have restored the immediate deduction retroactive to 2023 failed to pass the Senate last year, but since it failed on a procedural vote, hopes are high that it could come back to Congress soon after the presidential inauguration in January 2025. If so, businesses that have Section 174-eligible expenses from 2022 through 2024 may be able to recoup their costs immediately 

Energy tax credits. Many businesses have taken advantage of tax credits tied to clean energy efforts that were contained in President Joe Biden’s administration’s Inflation Reduction Act (IRA) of 2022. These credits will be available for the 2024 tax year but may be repealed in the future while retaining fossil fuel tax preferences. 

Proposed Policies 

The President-elect also had a number of proposals on the campaign trail. Proposals included: 

  • Decrease of corporate tax rate from 20% down to 15% 
  • Reduce the top long term capital gain rate from 20% to 15%
  • Exempt all social security benefits from income tax 
  • Exempt tip income and overtime pay from federal tax  
  • Eliminate the state and local income tax (SALT) cap 
  • Increase child tax credit to $5,000 
  • Allow deduction for auto loan interest 
  • Tax credit for caregivers 
  • Eliminate double taxation of U.S. citizens on income earned while living abroad 
  • Exempt cryptocurrency from capital gains tax 

Impact of TCJA ‘Sunsets’ 

Trump has indicated he would like to make the TCJA permanent, including lower income tax brackets. But whether that could happen in the first year of his administration – and what trade-offs would have to be made – remains to be seen. It’s important to note that if there are no changes in tax law next year, the expiration – also called “sunsets” – of numerous TCJA provisions on Dec. 31, 2025, will significantly change the tax situations of millions of Americans and business owners. Provisions set to expire that could be extended:  

  • Section 199a Qualified Business Income (QBI) deduction: The QBI allows owners of pass-through entities – which account for more than 90% of U.S. businesses – to deduct up to 20% of their business income against adjusted gross income. This deduction was included in the TCJA to level the playing field since the law also lowered the maximum corporate tax rate to 21%. However, the corporate tax rate was made permanent, whereas the QBI deduction is temporary. 
  • Higher individual tax brackets: The sunset of the TCJA’s lower individual tax brackets will mean generally higher taxes for most taxpayers, with the top rate returning to a 39.6% tax rate. But these rates will not take effect until the 2026 tax year, and Congress could act in the interim to keep them lower. 
  • Cap on state and local taxes (SALT): This TCJA provision brought protest in high-tax rate states when it was implemented, since the $10,000 cap it placed on SALT deductions didn’t even come close to actual costs. Approximately 30 states, including Kansas, Arkansas, Nebraska and Oklahoma, have enacted workaround laws that enabled pass-through entity owners to deduct the taxes as business costs.  
  • Like-kind exchanges: Like kind exchanges were limited to real property only under TCJA, excluding personal property from like-kind changes. This is likely to continue.  
  • Other items: Other items that will be impacted as expiring provisions include the AMT exemption, personal exemption and itemized deduction limits, and the estate tax exemption amount.   

Questions? 

Business owners who are in the midst of year-end tax planning should review their plans in light of the changes that are likely to occur in 2025 and seek guidance from their trusted advisors. 

If you would like to discuss your year-end tax planning, contact an Adams Brown advisor.